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Experts: Kodak may see bigger changes

Ben Rand
Staff writer
October 17, 2005

Much has gone right for Eastman Kodak Co. in the two years since it unveiled a plan for navigating the shift to digital imaging — but not everything. And that complex story means Kodak’s transformation may yet have some surprises, analysts say.

Rochester’s largest employer is battling trends that make it potentially vulnerable to strategic changes that are more profound than any seen over the past 24 months.

Experts say Kodak is at a point where it could be a candidate to be split into smaller but more focused pieces — or, in the alternative, be acquired by a larger company.

The factors driving these possibilities range from the ambitious and ongoing downsizing of the company’s infrastructure for manufacturing film, chemicals and paper to accelerating declines in sales of cash-rich consumer film and shrinking profit margins.

Kodak’s future will be top of mind this week. Top executives are scheduled to discuss the company’s strategic direction with reporters, analysts and investors on Wednesday in New York City. Presidents of several of Kodak’s key businesses are expected to provide updates.

Kodak is showing no signs of a dramatic change of course, despite persistent speculation on Wall Street. The company says it is committed to its current strategy, which involves investing in consumer digital photography, health care, commercial printing and other areas while aggressively shrinking its traditional chemical-based businesses.

The company also says it is confident it will have the financial resources to achieve long-term goals. “We are executing against the strategy,” spokesman Gerard Meuchner said this week in response to questions, “and we have every intention of continuing to do so.”

Most observers don’t expect the company to announce a strategic departure like a sale or spin-off on Wednesday, but they say such moves are at least possible and have gained in probability over the past two years.

“They are almost backing themselves into a corner and may not have much of a choice,” said Christopher Hayes, chief investment officer for Hayes-Fischer Capital Management Inc. of Rochester, which owns both Kodak stock and bonds.

The film business has over the past few years provided the company with ample capital to invest in digital imaging. If that stops happening, Hayes said, Kodak will have to look hard at several options.

“What they’ve been doing hasn’t made sense for shareholders,” Hayes said, noting that the current stock price is about where Kodak was trading two years ago. He adds: “If they don’t turn it around, the stock price is going to tank, and then, if it gets cheap enough,” it might attract corporate suitors or private equity investors.

While a strategic partner might make sense for Kodak, there is no obvious candidate, said Dennis Lohouse, founding partner of Bryce Capital Management of Pittsford.

As the film business produces less and less cash for the company, there is less and less reason to keep the company together in an integrated form, Lohouse said. “They’ve been redeploying cash into their digital business,” he said, “but there will come a time when that is no longer an option.”

Hewlett-Packard is the trendy candidate as a Kodak suitor, but most analysts and observers believe such a combination is a long shot, mostly because of ongoing issues facing HP. Other firms in the photo business are also unlikely, said Terry Faulkner, who retired several years ago as a top strategic adviser to Kodak executives.

Faulkner notes that if he were still working for Kodak and if he believed that the company had winning product lines in fields such as health care and printing, he would analyze the pros and cons of selling Kodak’s traditional consumer photography business. But, he notes wryly, “Those are big ifs there.”

While the chances of a huge strategic departure are greater than two years ago, a professor at the William E. Simon Graduate School of Business at the University of Rochester said he thinks Kodak will remain in its current form.

The company is making progress building an extremely competitive commercial printing business, has surged to the top of the U.S. digital camera market and remains a mainstay in health imaging, said Larry Matteson, a former Kodak executive.

“If looked at in the cold light of reality, (an acquisition) doesn’t make sense,” Matteson said.

Analysts say they also get the sense that Kodak is more interested in keeping its current portfolio intact. That doesn’t mean something couldn’t change, but “it’s still fairly early in the Kodak turnaround story,” said Jemelah Leddy, an analyst with McAdams Wright Ragen in Seattle.

Though unlikely, a photo retailer and longtime Kodak cheerleader says he thinks that strategic and tactical changes at Kodak are almost imperative.

Mitch Goldstone of 30 Minute Photos Etc. in Irvine, Calif., said he has growing questions about the company’s approach to consumer photography.

As an example, he cites recent additions to Kodak’s online photofinishing service, known as Kodak EasyShare Gallery. Kodak is now offering premium memberships. One package, for $49.99 a year, offers unlimited prints at 10 cents a piece, below the regular price of 15 cents.

Kodak should be looking for ways to charge more for printing pictures by adding value, not less, Goldstone says.

He objects to Kodak competing online with loyal retailers like himself and others. Goldstone has been one of Kodak’s most outspoken advocates.

“My contention,” he said, “is that memories are worth much more than 10 cents.”

Article originally published in the Rochester Democrat & Chronicle, link no longer available